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Too Good to Be True? How Trader Joe's Sells Affordable Goods

Feb 7 2015 - 3:00pm

There are many die-hard fans of Trader Joe's who will assure you that it's the best grocery store ever. And that's not just hearsay [1].

The great value for quality goods is what keeps customers coming back for more. But all of us have wondered from time to time how in the world Trader Joe's manages to pull that off. Although I don't ever want to ruin a good thing, my curiosity got the better of me and I decided to do some digging. Here are a couple of possible reasons:

1. Smaller spaces

"Most TJ's locations have less square footage than the average mainstream grocery store, so I'm sure they save on their overhead costs that way," says Nathan Rodgers of review site What's Good at Trader Joe's [2]. "And it appears they pass some of those savings on to their shoppers."

2. Smaller headcount

To keep costs down, the chain generally has a lower headcount in its stores [3] than its competitors, although there are exceptions. You won't find some of the traditional supermarket positions, like a butcher and a baker, at Trader Joe's, which also helps with costs. This means that customers can only buy precut meats and premade baked goods, but that doesn't seem to deter consumers.

3. Less selection

Trader Joe's has a smaller selection of goods, and most of its products are offered under the store-brand label, which differentiates it from other grocery chains. Fortune estimates that the typical grocery store has 50,000 items [4], while Trader Joe's has 4,000 — 80 percent of which are store-brand goods. Its small store sizes also don't allow for a bigger selection of goods.

This can be a negative or positive, depending on how you see the situation, because there are definitely people who do enjoy the smaller selection. Rodgers says, "Honestly, I have a hard enough time making decisions as it is. A smaller selection actually helps narrow down the choices. Plus, they're constantly shuffling things around and introducing new products. The thing that bothers me most is that they discontinue really great products occasionally."

By limiting its selection, Trader Joe's will buy larger quantities from suppliers. And it will restock at a faster rate because of the quicker turnaround — it is able to sell more of one type of product when there aren't too many choices. These two factors will drive down the costs. Although there isn't a lot of variety, customers are OK with that because they trust that the quality will be good, according to Fortune.

4. Not everything is certified organic

Some products have the label "made with organic ingredients," which Mark Kastel, cofounder of organic food industry watchdog group The Cornucopia Institute [5], says may mean only 70 percent of the ingredients in the product are organic. For example, the label may say the pizza was made with organic wheat and vegetables, but the cheese and meat might not be organic, which means you're getting a really "cheapened product."

"When you are going to Whole Foods or Trader Joe's or any store you have to be a conscious consumer because a lot of what is most profitable to them is not organic even though they really like to tout that they are organic," says Kastel. His advice is to take a careful look at the labels to make sure the whole product is certified organic.

5. Private about the suppliers

Trader Joe's is notoriously private about its suppliers. This is also a trademark trait of its parent company, German supermarket conglomerate Aldi. "Their hallmark is what we call private label or store brand. So you don't really know who is manufacturing it and where it's from or maybe the story behind the food," says Kastel. This enables Trader Joe's to use a competitive bidding system with suppliers and go with the lowest bid. Customers won't know when the manufacturer of the product changes.

The anonymity also benefits the suppliers as they don't want customers to know that they are making a lower-cost version for the Trader Joe's label. Last year, The Huffington Post did a taste test [6] comparing Trader Joe's products they speculated were produced by big brands to the actual products sold under the big-brand names. The testers found that although there was a big price difference, there were no obvious differences in taste.

However, the secrecy can brew dissatisfaction among some consumers. Vani Hari, investigative food journalist and founder of FoodBabe.com [7], says, "If you shop at Trader Joe's and buy their Trader Joe's branded products, you'll never know which companies are producing your food. You could be supporting a company with shady or unethical business practices. Other major supermarket chains like Target and Kroger are also creating their own private label products that also create similar concerns with consumers. With the increased emphasis on the 'voting with your dollars' mentality and ingredient labels, consumers want to know where their food comes from."

6. Efficient distribution and supplier system

The company also cuts out the middleman and buys a lot of its food directly from the suppliers, which translates to lower expenses and more savings for customers. Suppliers send their food to Trader Joe's distribution centers, where it then gets sent out to the stores. Traditional supermarkets usually buy their food through a distributor, which adds on more cost.

7. Food is sourced all over the globe

Food Babe's Hari says, "Trader Joe's is able to keep their produce and goods inexpensive because they source their goods from all over the globe — especially from underdeveloped countries where prices are cheaper." The danger in this strategy is the organic food industry in foreign countries may not be well regulated.

Back in 2008, to deal with the growing concern over organic food from China, Trader Joe's announced that it planned to phase out any single-ingredient food item [8] from China. This is a big deal given that not a lot of supermarkets follow suit. Whole Foods did not do the same and said it was in a "different position" and it didn't make sense to stop the progress it has "made with sourcing select high-quality products." However, although Trader Joe's phased out the single-ingredient items, it's not clear which multiple-ingredient products use organic ingredients from China and which other countries it is sourcing its single-ingredient products from.

8. Less money spent on marketing

The company is known for not spending as much money on marketing and advertising as its competitors. In fact, it doesn't even have an official Facebook or Twitter page.

Chances are, you probably heard about the grocery chain through word of mouth. The chain has such a devoted following that customers become the brand's best "advertisers," promoting the stores in various ways — from uploading images of their favorite Trader Joe's snacks on Facebook to convincing friends to shop there. The bonus in this strategy is that the advertising costs won't be tacked on to Trader Joe's goods.

So what does this mean for those who want organic food?

It means we have to be careful as consumers and read labels. We can also do our homework and learn how to shop smart. You can start with organizations like The Cornucopia Institute [9], which has several helpful reports such as one that ranks the quality of dairy of several suppliers and grocers [10]. Kastel recommends people shop at their local food co-op, which he says is the "gold standard of organic retailing."